When it comes to taking loans, one of the most important deciding factors is your credit score. Without a good credit score, it is almost impossible to get approval for a loan. Knowing how to build your credit score can be useful as it is the parameter which calculates your reliability and trustworthiness.
Although there are many ways when it comes to building your credit score, one of the safest ways is through obtaining a personal loan, it builds your credit score as well as provides you with other benefits when it comes to pre-approved loans.
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What is a Personal Loan?
A personal loan is the money that you borrow from a lender for your own unspecified use, this loan amount should be repaid monthly or in installments, over a fixed period of time set by the lender. The main benefit of issuing a personal loan is that it does not require any collateral and is a good way of going about how to build your credit score.
How does a Personal Loan help build your Credit Score?
There are a few ways in which taking a personal loan can help you make better financial decisions and increase your credit score.
Settling Existing Debts
One of the biggest advantages of taking a personal loan is to use it for settling any existing debt which is needed to be repaid urgently. Now you might think that using another loan to repay a previous loan is the same but actually, it’s not.
A personal loan has a much longer period of repayment than any loan you take on your credit card. The repayment method of a personal loan is more flexible than credit card loans. Hence, it acts as a clever decision to use personal loans to settle your existing debts because you can pay back your personal loan in plenty of time, without much stress.
As a result of consolidating your debts in time, you get to build your credit score easily. Apart from this, there are other advantages when going about how to build your credit score like choosing personal loans to clear your credit card debt at a much lesser interest rate.
To understand this more clearly, here is a simple example:
Suppose you have to pay 10000 pounds back to your lender at an interest rate of 20%. By using a personal loan, you can avail the same amount (10000 pounds + interest) as your personal loan at an interest rate of only 10%. This way, you are repaying the same amount, but at half the interest rate.
Consider Using Credit Building Loan
A Credit Builder Loan is when you pay a monthly payment first to make up for the amount of loan that you require and the interest rate. At the end of the tenure, the whole sum will act like a savings account for you.
You can consider this option when you have a minimum amount of debt to be cleared. If you are facing debts, you can use this credit building loan to settle those quickly and thereby, build a healthy credit score.
Enhancing Credit Combination
How to build your credit score effectively can be done by having different kinds of loans on your credit report, this can add up to building a good credit score. A large part of your credit counts as revolving credit. Adding personal loans to that will help you enhance your credit variety which in turn, will maximise your credit score.
Retains A Healthy Credit History
When going about how to build your credit score, remember that the credit score is deeply affected by your credit history. The better and less black-marked your credit history is, the higher your credit score will become. Normally, a black mark will reflect on your credit report for a period of 6 years.
By taking up personal loans, you will be able to clear your debts in no time and without facing additional hurdles. Your existing debts will be repaid in time and due to this, you will not face any fees relating to penalties or defaults.
Personal loans are a good way of how to build your credit score, they can help you retain a long credit history by paying back regularly in installments. This, in time will add to your overall credit score.
Take Small Personal Loans
The more frequently you repay the loan amount you owe, the higher your credit score will be. Therefore when starting the process of how to build your credit score, start by taking small amount personal loans and use them to settle small amounts of debts.
Don’t clear your existing debts in one shot. It would be wise to make multiple payments in installments, maintaining not only good credit history but also a good credit score.
Minimise Your Credit Utilisation
The more you utilise your credit, the lesser your credit score will be. When searching for ways on how to build your credit score, it is important for you to stay within the boundaries of your credit limit and keep the credit utilisation as low as possible. By using personal loans to settle your credit card debts, you actually keep your credit utilisation at a minimum.
Hence, by availing a personal loan, you are on the right path to financial stability. It may take time for your credit score to reach your expectations but these tips will help to fasten the credit building process.